Centennial Resource Development Crashes After a Disappointing 2019 Guidance


Centennial Resource Development’s ([stock_market_widget type=”inline” template=”generic” color=”default” assets=”CDEV” markup=”NASDAQ: {symbol} {currency_symbol}{price} ({change_pct})” api=”yf”]) stock has lost over half its value in the past six months, and the company’s recently released results have ensured that it won’t be making a comeback anytime soon. The company’s fourth-quarter results missed analysts’ estimates by a wide margin, and this led to yet another round of massive sell-off.

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Centennial shares have been hit hard in recent months thanks to the uncertainty around oil prices, even nice year-over-year growth in its financial performance wasn’t enough to boost investor confidence. Let’s see what went wrong for this unconventional oil play.

Centennial’s Production and Revenue was Good, But Not Good Enough

Centennial reported $222.5 million in fourth-quarter revenue, up nearly 34% from the prior-year period. The company’s solid top-line growth was the result of a substantial production boost. The company’s average daily net production volume for the fourth quarter was 69,609 barrels of oil equivalent per day, up significantly from the prior-year period’s production of 44,304 BOE/day. Crude oil accounted for 57% of the total production.

Thanks to the higher production, Centennial was able to easily offset the negative impact of weak oil and gas pricing as far as its revenue is concerned. The company’s average crude oil sales price was $49.36 per barrel last quarter, down from $52.08 per barrel a year ago. The price of natural gas and natural liquids also took a deep haircut, coming in at $1.94/Mcf and $23.60/barrel, respectively, as compared to last year’s pricing of $2.69/Mcf and $31.16/barrel.

However, lower energy prices led to a flat bottom line performance. The company’s net income of $31 million, or $0.12 per share, was in line with the prior-year period. However, the market was looking for $0.16 per share in earnings from Centennial, so disappointment on this front created panic among investors and caused a huge sell-off.

What’s more, the uncertain oil pricing environment has forced Centennial to cut back its spending this year. As such, the company’s production growth is expected to slow down this year, and this seems to be another cause for concern for investors.

2019 Guidance Shows More Problems Ahead

The company is sitting on $700 million in long-term debt and it only had $18 million in cash available on its balance sheet at the end of the previous quarter.

Centennial’s 2019 capital expenditure of $845 million represents a 15% reduction over last year’s outlay. As a result, its crude oil production is expected to increase just 12% in 2019, down from the massive 81% increase witnessed last year.

This tepid production increase along with the oil pricing environment will likely knock the wind out of Centennial’s growth rate this year. This hasn’t gone down well with investors who have been used to witnessing a fast pace of production growth from the company so far.

However, Centennial didn’t have any option but to reduce its capital spending given the massive debt that it carries. The company is sitting on $700 million in long-term debt and it only had $18 million in cash available on its balance sheet at the end of the previous quarter. So it needed to tone down its expenses in 2019 in order to stay within its means, otherwise, it would have had to take on more debt.

In the end, it’s likely Centennial won’t be turning around any time soon, and that’s why investors have decided to jump ship after its latest quarterly report.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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